Room at the silo, after all

Defying expectations, a storage crunch failed to materialize at district elevators last fall.

Most people in the farm business were expecting to see huge backups at grain elevators throughout the district last fall as harvests outstripped storage capacity. A bumper harvest was looming; in response to higher prices and demand from ethanol producers, more acres of corn were planted in 2007 than in any year since World War II.

Because an acre of corn yields about twice as many bushels as an acre of soybeans or wheat, the switch to corn by many farmers was expected to further strain storage capacity that had been scarce in previous years, due in part to a dearth of rail cars to ship grain to market.

"We were sitting here going into the fall of '07 thinking we were going to have humongous piles of corn on the ground," said Howard Shepherd, a grain industry analyst at Iowa State University in Ames. Ground storage at elevators—a common sight at harvest time in recent years—is a serious problem for farmers, who have to sell their grain at lower prices if exposure to moisture reduces its quality.

But when harvest time came, the anticipated storage crunch never materialized. Roger Krueger of the South Dakota Wheat Growers cooperative, which operates about 20 elevators in the state, said that grain didn't pile up at any of his elevators last fall. He added that unlike in 2005, when hurricanes Katrina and Rita held up grain barges on the Mississippi River, very little grain spoiled in 2007.

Instead, overall storage capacity was sufficient to take in the bountiful harvest until trains could ship it to market. "Grain has kept moving in the system; it hasn't backed up," said Bob Zelenka, executive director of the Minnesota Grain and Feed Association.So why did the expected grain mountain turn out to be a molehill? Credit foresight by elevator operators and farmers, and strong demand for district grain overseas.

Building a way out

A districtwide increase in off-farm storage capacity did much to prevent the customary harvest-time backups. Responding to greater demand, elevator operators invested in more storage space. Data from the U.S. Department of Agriculture (USDA) show that in Minnesota (which has the greatest storage capacity of any district state thanks in large part to the food processing industry), capacity at grain elevators and other off-farm storage facilities increased nearly 3 percent in 2007 over the preceding year. In North Dakota, off-farm storage capacity increased almost 10 percent (see chart).

Growers, fed up with packed elevators and too few rail cars, have been adding storage on the farm as well. For the Ninth District as a whole, capacity in silos and other on-farm facilities has increased as much as or more than elevator capacity (see chart).

In Minnesota, for example, farmers built three times as much storage space on the farm in 2007—about 60 million bushels worth—as was added at off-farm sites. On-farm storage in Minnesota—which accounts for about 70 percent of the state's total storage capacity—increased almost 5 percent.

Capacity grew differently in other states. For example, storage at elevators and other off-farm sites in the Dakotas and Wisconsin increased more than on-farm storage last year. Overall, total storage capacity grew in all district states.

Farmers and elevator operators take risks when they build more space. What if the harvest isn't as big as forecast, or crop production shifts away from bulky corn? A couple of new developments have reduced those risks. One is a USDA program that gives eligible farmers subsidized, low-interest loans of up to $100,000 for construction of on-farm storage.

Another is the advent of "condominium storage" contracts that allow elevator operators to hedge their bets by locking farmers into long-term commitments. Typically, farmers rent elevator space on a season-by-season basis as the need arises; condo deals allot farmers a certain amount of elevator space for up to 20 years in exchange for a down payment and regular installments. The arrangement reduces the risk of investing in new storage space and guarantees farmers storage in the future.

Keep it moving

The other side of the storage equation that has eased the capacity crunch is robust demand for grain, which continually empties elevators and farm silos as they fill up.

One of the major industries driving the shift toward corn—ethanol distilling—has also kept that corn moving to market. Corn prices have risen 70 percent since 2004 as demand for the main ingredient in ethanol has soared (see chart). On the one hand, ethanol production increases demand for corn storage, because many distillers won't accept grain that has been stored on the ground or uncovered, for fear of contamination. On the other hand, strong demand for clean corn by ethanol plants has been quickly clearing out storage bins.

Another key factor keeping grain flowing is brisk international trade. The weakening dollar has made U.S. grain cheaper abroad, stimulating exports. Intermediaries who previously sat on caches of grain hoping for higher prices are now shipping, freeing up space in seaport elevators for district grain.

Demand for U.S. wheat in particular has been fueled by recent poor harvests in competing grain-producing countries. Argentina reaped a below-average wheat harvest last year, and Australia suffered a severe drought.

Gauging demand

Given that inadequate capacity seemed inevitable last summer, might piles of uncovered grain mount across the countryside after future harvests? Or is the additional capacity that has been built in recent years, including last year's construction burst, sufficient to satisfy foreseeable demand?

One factor that agricultural experts worry about is a decline in ethanol production, because of concern that demand for corn to feed ethanol plants is driving up food prices. Lower corn consumption by distilleries could conceivably leave corn sitting in silos or on the ground. But an ethanol bust isn't likely to lead to another capacity crunch. Owing to rising prices for soybeans and wheat, and uncertainty about future demand for corn, farmers are expected to shift acres to those crops next year. The resulting harvest would be less bulky, taking up less storage space.

Another very real concern is that U.S. grain exports will ebb if foreign harvests improve or the dollar rebounds against other currencies. A slowdown in exports could lead to a domestic grain glut and brimming storage facilities.

One thing seems certain in the grain-storage market: Barring a disastrous grain harvest in the district this fall, it's unlikely that elevator operators and farmers have built too much capacity. Like all investors, developers of storage space try to gauge future demand so that their assets retain value and they can continue to make money.

"Elevators are conservative in their decision-making, just because they have to be," Zelenka said. "Do you build a church for the Easter Sunday crowd?"